What to Know About Inflation in China
Mar 21, 2022
The economy grew at its lowest rate in a year and a half in the final quarter of 2021, reflecting a broad-based decline in the agriculture, industry and service sectors. Overall activity was dented by the worsening business climate and tough regulations.
Looking ahead to the first quarter of 2022, data suggests that activity slowed as the Omicron variant of the Communicable Scars Virus spread domestically, along with weak household spending. The manufacturing PMI slipped into contractionary territory for the first time in nearly two years. But more accommodative fiscal and monetary policies should help boost activity later in the quarter. On a positive note, resilient credit growth should also help support the economy.
Today, let's dive explore everything you need to know about inflation in China.
Chinese Economy in 2022
Despite the ongoing trade war between the U.S. and China, data suggests that China's economy is on track to achieve its target of 6 to 6.5% growth this year. Last week, the Chinese government released reports suggesting that manufacturing PMI hit a nearly two-year high and that the services sector continued to expand. The recovery in the housing market and robust lending activity will also contribute to growth.
However, the United States is still more reliant on China's economy than the other way around. The trade war has severely affected America's agricultural and tech industries, which have prompted businesses to hold off on investment. This has effectively slowed down the growth rate in the U.S., as it's the largest economy in the world.
As a result, the Federal Reserve has been unable to raise interest rates. The Federal Open Market Committee frustrated businesses and investors by delaying a rate hike in its November meeting. This delay highlights the Fed's fears over the ills of a trade war; it's unlikely that the Fed will raise rates in early 2022, as it needs the U.S. economy to become a lot more stable before it can risk increasing borrowing costs.
As a result, the Fed has been unable to raise interest rates. The Federal Open Market Committee frustrated businesses and investors by delaying a rate hike in its November meeting. This delay highlights the Fed's fears over the ills of a trade war; it's unlikely that the Fed will raise rates in early 2022, as it needs the U.S. economy to become a lot more stable before it can risk increasing borrowing costs.
For the foreseeable future, the Fed is expected to keep rates low. This is a blessing in disguise for China, as it will continue to fund the country's growing debt pile. According to the International Monetary Fund, China's debt has risen sharply over the past few years, reaching $28 trillion before the end of 2020.
Why is China's Inflation Relevant?
China's economy is the second-largest globally, and its inflation rate has a significant effect on global markets. Since the beginning of this year, the country's inflation has been on a steady climb of about 2.4%, and it's expected to pick up speed in 2022.
China's services PMI hit a cycle high of 54.3 in May, suggesting that the country's GDP growth is a lot stronger than the headline data suggest. With the US-China trade war continuing, economic activity is likely to strengthen further in the coming months.
Chinese inflation is also crucial for American investors, as it affects the value of the Yuan, which has an impact on China's foreign exchange reserves.
The country's foreign exchange reserves peaked at $4 trillion in 2015, but they're now hovering at around $3.7 trillion as the trade war has taken a toll on the value of the Yuan. However, the country's trade surplus is looking healthier now than it has since 2013, suggesting that the trade war is beginning to work in China's favour.
A weaker Yuan will help boost the country's exports, a boon for Chinese manufacturing firms. Chinese companies are also finding ways to cut costs, which will help the country increase its competitiveness in terms of export prices.
China's foreign reserves are likely to improve in the coming years, as its trade surplus is expected to remain strong. If the trade war ends soon, China's inflation rate will likely remain around 2.4% for the foreseeable future.
How is China's Inflation Measured?
China's inflation rate is measured by the Consumer Price Index (CPI), a statistical measure that tracks the price of a basket of goods that a typical urban household would purchase in the country. The CPI is also used to highlight general changes in the economy.
A surging CPI indicates that inflation has increased. This means that the price of goods is rising and purchasing power has fallen. However, a declining CPI could indicate a deflationary period. In deflation, the cost of goods is falling and purchasing power rises.
While high inflation can be a useful measure for policymakers, it's essential to look at the whole picture. If the environment is deflationary but demand remains high, the CPI can rise because of high demand. So, the CPI may not always be an accurate measure of inflation. As a result, economists use a wide range of data, such as the Producer Price Index, the Consumer Price Index, the Retail Price Index and the Consumer Confidence Index.
China's CPI has increased for the past three months, as it rose to 2.1% in October. The highest inflation rate was in July when it was 2.2%. However, the CPI was at its lowest point in March and May, when it was 0.8%.
CPI vs PPI
There are a few different variations of the CPI, but the most important differences lie in their scope and history. The PPI is a measure of the prices of goods sold for intermediate consumption. Intermediate goods are used as inputs to make other goods, and they're typically sold by companies operating at a higher level, like manufacturers.
Since intermediate goods are sold downstream by the supplying business, they don't affect the final product price that consumers purchase. For example, if a manufacturer buys a kilogram of metal wire, it's the manufacturer's price that the PPI tracks. Once the manufacturer uses that wire to make a product, it's sold and tracked by the CPI.
Why is China's Inflation so High?
Inflation is an important concept to understand, as it helps explain how prices rise in any economy. Inflation occurs when consumers expect the price of a good or service to rise in the future. This leads them to demand more goods now before the price goes up.
This can cause a rise in the price of goods in the near term. For example, if you're buying a house, you want to get the best price possible. So, you may push the seller to accept a lower price in the near term. However, the seller can also benefit from this scenario. They can realize that the price of the house is likely to go up in the future. So, they may push you to accept a higher price, knowing that they will still have a good profit when they sell the house in the future.
This behaviour happens on a mass scale in the Chinese economy. Inflation is currently of particular concern in China, as prices were high even before the government devalued the Yuan. When the government cut the Yuan's value, it caused inflation to soar in real terms.
Global Effects of China's Inflation
China's inflation rate has a significant effect on global inflation, as its products are found worldwide. On top of that, China's inflation has a huge impact on commodities, as the price of raw materials usually rises as inflation increases. This has a ripple effect on global markets and can cause factors that have nothing to do with economics at all. For example, oil prices have risen over the past few years, contributing to the Greek debt crisis.
Inflation is brought about by two main factors: supply and demand. If the supply of a good or service is limited, prices will increase as demand increases. If the supply is unlimited, prices will remain stable. It's important to remember that very few goods and services are completely unlimited.
The demand for goods and services can also cause inflation. If consumers begin to demand a lot more products, for example, prices will rise proportionately.
Effects of China's Inflation Rate on the U.K.
China's inflation rate is vital to the U.K. because it affects all of the country's goods. The U.K. imports around £10 billion in goods from China every year. The country then sells the products in the U.K., where the inflation rate will affect the price.
As a result, China's inflation rate has significantly impacted the U.K.'s inflation rate, which has increased in recent months. In October, the U.K.'s inflation rate reached 3.1% and is expected to increase further in November.
This is partly due to the weaker pound, which has lowered the price of imports since the U.K. voted to leave the E.U. The U.K. imports a lot of its food from the rest of the E.U. The U.K. has also seen an increase in domestic inflation, as the rising cost of goods and services is pushing up costs across the board.
What is the Outlook on China's Inflation?
China's inflation is expected to continue rising in the coming years, as the country's economy is experiencing higher inflation than in the past decade. China's consumer prices are also expected to rise about 2.4% in October, which is higher than the country's CPI in previous months.
However, the country's benchmark rate is expected to fall to 1.8% in 2022. The country's inflation is expected to rise in the near term, but it's likely to slow down as its economy continues to slow down.
It's important to remember that China's CPI doesn't necessarily reflect the true cost of living. The CPI reflects the cost of a fixed basket of goods, and these goods are not necessarily reflective of how people live. As a result, the CPI is an imperfect measure of inflation. However, it's still an excellent way to judge the trend of price changes.
What Changes Should You Expect?
Most people expect the Yuan to hit 5.4 to the Dollar by the end of the year. However, predictions for the end of 2019 are a little more varied. Some people expect the Yuan to end the year at 6.3 to the Dollar, while others expect it to end at 6.6.
If the Yuan continues to strengthen, it could be an excellent time to buy stocks and other assets in China. With a stronger currency, the country will increase its exports. If you buy at the right time, you may benefit from this trend.
If you remember, the Yuan experienced a massive devaluation in 2016. The Yuan hit its most vital point in several years on November 9th, 2016, when it was worth 6.1068 to the USD. However, the Yuan fell again in 2018.
How Are Investors Reacting to China's Inflation?
Investors are keeping a close eye on China's trade policies, and the consensus is that the trade war is not going to end anytime soon. As a result, the Yuan is expected to remain pretty weak in the near future.
Investors are also paying close attention to changes in China's GDP growth rates. China's GDP growth rate decreased in the second quarter of 2018, and it's expected to fall even further soon. A significant reason for this decline was a decline in the country's exports.
How to Trade China's Inflation
The easiest way to trade China's inflation is to buy investments that will do well in a high inflation environment. That's why China's inflation is so crucial for commodities. Commodities such as iron ore and copper will likely benefit from higher inflation levels.
If you'd like to purchase copper futures, you can order with a discount broker. You can easily buy individual stocks, options or contracts on the market. If you're looking to purchase iron ore futures, you have to do it through a futures exchange.
The Bottom Line
Inflation is one of the most important concepts to understand, as it has enormous effects on a country's economy and the global economy. If a country's cost of living is rising, it has a negative effect on GDP and GDP growth rates. That's why it's so important to keep a close eye on China's inflation.
China's inflation rate has been rising in recent months, and this trend is expected to continue throughout 2018. If you're looking to invest in China, it's essential to keep a close eye on this trend.
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